This Blog is my take on life.
I'm not perfect. Neither is my writing.
@vizagobelix

Sunday, January 11, 2015

Better Grey than Garishness

This article will be best understood by those who have an interest in trading and follow the markets. It isn't entirely a financial article, but the examples used are all from the stock markets.And be warned - this is a long, rambling post. But there's a benefit - by reading this and quoting what you've read, you can appear mighty 'insightful' among your friends ;)
We inhabit a strange world. A world where we talk about absolutes and extremities, but in reality, a world which is firmly grey. In fact, we don't want to leave the grey. If we come close to the extremes, we worry. The world goes jittery, and all kinds of 'breakthrough ideas' will be contrived!

Lets start this article from a financial standpoint and then go abstract as we often do on this blog :)

The economies of the world are firmly in the grip of intense volatility, driven by the incredible fall of Crude oil prices. For the uninitiated, no, it isn't only Mr Modi's government that's bringing down our Petrol prices. He's being aided by OPEC and something called Shale Oil, and Crude oil prices have fallen from $105 to under $50 in the span of months, throwing the world's markets into a situation they've never been in. The last time oil was this cheap was way back in 2009, and that was a whole different set of circumstances.

When Oil prices were at their zenith last year (over $110), we cribbed about the price of Petrol hitting ₹80 and of the cascading effect crude prices were having on everything we consumed - vegetables, milk, transport services. Inflation was through the roof. Lets consider that as one extreme, for the sake of this article..

Now, its at the other end. No one would have expected these oil prices to fall this drastically. All the experts who come on TV and write for newspapers have been busy revising their targets downward and finding reasons to justify the fall. They've all done it a dozen times already, and the end isn't yet in sight. Since this post isn't by an 'expert' and since it isn't to talk about the reasons behind this fall, lets not delve into that. But rather, the $50 level was last breached in 2009, and many may remember that that was the year of the stock market bloodbath the world over. 2008 and 2009 were horrible years for investors. Companies fell like dominoes, and had to be propped up by government with money they did not have! We're still suffering the after effects of that virtuoso!

Grey areas are what we're interested in here, and to drive home the point, here are two screenshots -

The first one is the chart of BPCL over the last six months. The price was at a steady ₹550-570, and suddenly it started moving up after August when the oil slide became significant. In November, you'll notice the price at its all time high of ₹760. That was when oil came to under $70.
Now, if you read your news, you'll know that oil is nowhere close to $70. Its under $50, and that is what makes this chart mighty interesting. As crude dipped below $70, strangely, the price of BPCL started falling again. This is the same with all oil marketing companies. If you're wondering about why I'm mentioning oil marketing companies here, they are the biggest beneficiaries of cheap oil. India's subsidy burden this year is expected to come down by over ₹70000 Crores because of this rout in global oil prices. Much of that will be routed through oil marketing companies like BPCL and HPCL, and that is why the price of their shares shouldv'e gone through the roof.

This second chart is the price of Crude Oil during the same period. The $70 mark, if you observe, was breached around the same time BPCL hit its lifetime high of ₹760+. And as oil kept falling, the share prices fell too.

Now on to the explanation part. And this is mighty interesting :)

As a net oil importer, the price of crude, by far, is the largest component of of our subsidy burden. And since we're a welfare state (truly), our GDP is wholly influenced by the amount of subsidy that's being paid from money that the government doesn't have! Petrol, Diesel, Fertilizer, LPG, all are linked to the price of incoming crude oil, and that is why we're about to save over ₹70000 crore this year. Theoretically, since we're a net importer, the lower oil prices fall, the better it should be for our economy as we'll save that much money - which can be used elsewhere, or atleast can fill in a bit of our fiscal deficit. Its a dream come true for economists. But only on paper.
In reality, as an integral part of a global economy, we can't afford to have oil prices falling too low either - in this example, under $70. Here's why.

The World's economy is ruled by oil. Inflation is directly linked to the price of crude. As oil moves upwards and downwards, it plays with the global economies. So when the countries which make up OPEC aren't making even their production cost (yup - they're losing money on every single barrel of oil produced at these prices), they have a very real possibility of going bust. Now who has investments in these oil production facilities? Right. The biggies. The very same companies who're controlling the world oil market - and through it, the world economy. Next question. Who's making investments in India and other emerging markets via FIIs and FDIs? Bingo. The very same biggies who have to park their wealth some place and grow it further. This isn't some conspiracy like my earlier post on Thrive. This is real, and since our economy is interlinked with the world's economies, we can't afford to let that happen!

So what do we do? As soon as there is a feeling that we're coming close to an extremity, there is an immediate corrective action. In this case, as soon as oil fell to those levels, the world's economy teetered. Markets which were flying along suddenly crashed, and currencies tumbled. Euro has gone down to its lowest ever value against the dollar. And the result? For the last 3 days, global markets have gone up again, and oil has stabilized at around the $50 mark - up by a few dollars. 'Experts' have come out in full force predicting the rise of oil again, and there is a very real possibility that OPEC will announce a cut in their production levels at their next meeting. That should result in the oil prices going up further, and all's well with the world!

I'm not a master at the markets. There may be errors in my analysis above, but that's just opinion, and not to be published in a text book!

This is but one example. The funny thing about our economies, is that we can't let it grow too much or fall too much. Look at inflation, for example. If inflation reaches to crazy levels, we predict Armageddon. If it falls too much, there are new terms thrown into the mix - called 'deflation', and that's dangerous for the world markets too! Interest rates reaching 12 and 13% isn't good for the markets, and neither should they reach 1 and 2%. There are world markets which have almost zero % savings interests, and we're at the other end of the spectrum. India has credit card interests of upto 48% and the USA has the same credit card interest from the same banks at crazy prices like 1.8%!! Since these banks hedge - meaning they balance out the high interest rates we have with the low ones in those countries, they manage to profit. The world is all one big revolving door, and we can neither let it spin too fast or too slow. Both will throw the markets out of their carefully maintained balance.

In simple terms, we can't grow at someone else's expense any longer. That is precisely what happened in our world till the industrial revolution started two centuries ago. Since then, it has been in the interest of the manufacturer to ensure that the buyer has enough money to buy from him. And if he doesn't have the money, the manufacturer himself finds ways to fund that buyer indirectly, and then get back that money by selling to him. Visualize that? That's a simple, one dimensional example. Our economy of today is enmeshed with everyone else's, and the greyer we are, the more comfortable we are with each other! A tilt either way, and we lose sleep! We just want the markets to move a bit here and a bit there so that the traders can make a profit, and then come back to its balance. That, strangely, is the truth of our markets. Currencies, Commodities, we want them all to be cyclical. The shallower the cycle, the happier we are.

Now, this post isn't just about financial markets. The same example can be used on any field to similar results. Since this oil rout and its after effects happened this week, I've used it as an analogy. The same principle is true in our lives too. We are firmly entrenched in the greys of the world and each time there is a sight of either black or white from the extremes, we get worried. We can't allow ourselves to get either too left wing or too right wing. The checks and balances in the world instantly rise up or calm down depending on which was the axis tilts. And we shun the ones who are deep on either side as 'extremists'. When our kids play games continuously on the phone, we tell them to go read a book. If they start reading a book at all times, we give them a game and say play it for a while. We have reasons and justifications that we use to substantiate our decisions, but the truth is that we don't want to be too much of anything. As Humans, we've been trained to straddle the line, be somewhere in the middle. In one of the shades of grey. That's where we all are, some in a deeper grey than the rest, some lighter.

No wonder finding true freedom while living as a part of society is quite out of the question!

About Me

An absolute fan of Bill Bryson and Malcolm Gladwell;
Every book with the names Lee Child, Jeffrey Archer, Sidney Sheldon, John Grisham, Frederick Forsyth, David Baldacci, Michael Connelly, Harlan Coben, and some from James Patterson, Robert Ludlum and dozens more.